Download PDF - BayHill Capital

Comments on the 2016 Q2 GDP figures
Andrew Newell, Private Client Manager, BayHill Capital
The positives:
 The SA economy grew by 3.3% in the second quarter of 2016 on a quarter-on-quarter,
annualised, seasonally adjusted basis.
 This is surprisingly strong growth and the last time the country saw growth of this magnitude
was in Q4 2014.
 The primary impetus for growth came from manufacturing production (which grew 8.1% in
the quarter and accounted for 1% of GDP growth) and mining and quarrying production
(which grew 11.8% and contributed 0.8% to GDP growth) as platinum group metal output
rose.
 To some extent, mining and quarrying performance was a result of base effect, having slumped
by -18.1% in the first quarter of the year.
 However, credit must be given to the weak rand which seems to have played an important role
in giving the SA economy the shot in the arm that it needed.
 This is quite apparent in our international transactions. Exports rose by a massive 18.1%,
largely as a result of higher precious metals exports as well as vehicle and transport
equipment. At the same time, imports were down by 5.1%, as imports of machinery and
electrical equipment declined.
 Importantly, growth came from all three industry sectors – primary was up 8.8%, secondary
rose by 5.3% and tertiary increased by 2.0% – meaning that there was a broad contribution
across the economy.
The concerns:
 It is worrying, although unsurprising, that agriculture is still a headwind for economic growth.
Agricultural output declined modestly by 0.8% and it is encouraging to note that this is its best
level since the fourth quarter of 2014.
 Perhaps the greatest cause for concern is the level of Gross Fixed Capital Formation which
decreased by 4.6%. The main culprits in causing the drop were construction works and
machinery and other equipment. This is the other side of the rand effect – slowing imports of
capital equipment, leading to a decline in investment spending. It also reflects a lack of
investor confidence.
The outlook:
 While this performance is significantly better than growth expectations around the 0.5% level,
it doesn’t change our outlook of a lacklustre full year. A lack of investment will play into lower
productivity in the current six months, while the rand has recovered from its extremes.
 Regarding the potential for a credit rating downgrade for South Africa, what the rating
agencies want to see is better economic growth as well as policy and political stability and
clarity. We have satisfied the first requirement, but the second has yet to be fulfilled.
www.bayhillcapital.co.za
A member of the Peregrine Group. BayHill Capital Proprietary Limited (registration number 2004/026048/07) is licensed as a financial
services provider in terms of the Financial Advisory and Intermediary Services Act, 2002.


With only some of the boxes being ticked, private capital will sit on side lines for a bit longer.
We should also watch for interest rate hikes. As much as this GDP growth number is good, if it
repeats itself, it provides scope to the SA Reserve Bank to hike interest rates, given that
inflation is still at the top of the target range of 3%-6%.
ENDS
About BayHill Capital
A member of the Peregrine Group, BayHill Capital is a niche investment company that offers bespoke
portfolios for private clients which enables the firm to build unique and exciting client offerings. This
is complimented by the team’s deep knowledge and skill in the small mid-cap market, as well as its
strong capabilities in the use of CFDs.